The People's Bank of China (PBoC) will stick to a cautious monetary policy strategy despite risks that the trade war with the US will develop into a currency war. In recent weeks, the US-China trade dispute has escalated as the US announced plans to tariff the remainder of Chinese imports while also labelling China a 'currency manipulator'. Last week, China then allowed the Yuan to depreciate beyond the key level of seven to the Dollar, which caused risk assets such as equities to decline, while sovereign bond yields extended their fall.
Even though the dispute has taken a turn for the worse and the Chinese manufacturing sector has been contracting for over half of 2019, Chinese policymakers are satisfied with the current state of the economy and are waiting for a more' objective view' before adjusting their monetary policy. Economists still expect a cycle of monetary easing from China over the coming months, especially if new tariffs are implemented in September as expected. China has previously stated it has a large arsenal of tools to provide monetary stimulus – a position that most developed economies are not in. While the US has more room than most for monetary stimulus, clearly China is able to ease at a quicker rate and in greater overall capacity than the US. There's no telling how much the Yuan would slide in this eventuality, but policymakers will be acutely aware that they mustn't allow the same level of capital exodus that befell them in 2015.
Bottom line: China may have a greater ability to provide effective monetary stimulus than the US if the trade dispute continues to weigh on the global economy. Even though Trump's administration has denied ambitions to weaken the Dollar directly, Trump's persistent pressure on the Fed to cut interest rates is likely to devalue the Greenback indirectly. With trade tariffs close to being maxed out, it seems that a shift in attention to the Dollar and Yuan is inevitable.
The Pound staggered lower during Friday’s trading session as markets digested the poor UK GDP quarter-on-quarter figure of -0.2%. This places the UK one negative quarter away from a technical recession and markets weren’t afraid to sell the Pound as a result. This morning, the currency pair moved within 1.5% of the post Brexit ‘flash crash’ low of 1.1841 as we move closer towards uncharted territory.
For Friday and overnight, the move in GBP/EUR was much the same as the move in Cable. We moved to the lowest level since October 2009 as the pair breached the 1.0745 low of August 2017. With no high-tier data to come out today, any political developments could act as a driver for the pair.
The pair traded in a relatively tight range on Friday as markets were apprehensive over both the potential collapse of the Italian government and signs of China devaluing the Yuan. Technically, the pair has just dipped below a key six-month retracement level following a morning wave of Euro weakness.